Is it Time to Expect Lower Returns on Asset Investments?
Asset investment confidence has been high in recent months, driven by a booming economic recovery in the United States and a sense that the Coronavirus Pandemic is being brought under control.
Investors have been drawn to investments like stocks, bonds, and real estate, seeing some security, as well as the potential for strong gains.
One of the biggest challenges for financial advisors and anyone in the industry is keeping the expectations of investors in check. Investors, particularly those who are inexperienced, often demand larger returns than what the market can actually provide. Even some experienced investors may have become accustomed to unreasonably high returns, due to the relative strength of the stock market in recent years.
What Does Market Research Say About Investor Confidence?
Asset growth in the last year suggests that investors have a risk appetite, yet surveys show that investors still have reduced expectations regarding their short-term targets.
The data doesn’t always relate directly to expected returns, but it can still offer context.
- According to a 2020 Gallup Survey [1], investor optimism hit a four-year low in the second quarter of 2020. Even as it recovered towards the end of last year, it remained less than half, on a points basis, of what it was in the first quarter of 2020.
- Investors that follow industry news likely expect smaller returns on their investments in the coming years. PWL Capital, a major investment advisory firm, recently released data suggesting that the nominal rate of return on investments moving forward will be 6.0% when factoring in expected inflation [2].
6.0% is a return that’s far smaller than the 10%, 20%, or even 30% that some inexperienced investors expect to receive when first entering the asset market. However, it’s also in line with historical averages.
Looking back over the previous 121 years, global equities have produced a real annualized average return of 5.2%.
Should Investors Expect Lower Returns in the Coming Years?
Even with some recent pullbacks, the stock market is stronger than it has been in history. The bond market is stable although returns are relatively weak. Real estate is strong, with the median selling price of a home in the U.S. up by 10% in the first quarter, compared to 2020.
To say that investors should expect smaller returns is a poor way to position the current investment economy. It all depends on the individual investor. Relative to the previous year, some investors could expect stronger returns, especially when selling real estate assets.
Bond returns are expected to be low (although reliable) because of the low interest rate environment. Stock returns are difficult to predict although the market is relatively positive today. America is in the middle of an economic recovery. GDP expanded by 6.4% in the most recent quarter.
As long as the recovery is ongoing, asset returns are likely to remain moderate to strong, just as they are today. The 6.0% nominal rate of return suggested by PWL Capital is an excellent benchmark point because it is both realistic and consistent with historical expectations.
Growth periods (like today) are ideal for generating strong returns. As long as investors are aware that the conditions won’t last forever.
Any investor expecting returns above 10% in a well-diversified portfolio should reassess their targets and recognize that rapid growth and high returns can’t be sustained. Experienced investors happy to take sustainable but slightly lower returns will be satisfied with the asset market in the months ahead.